Tag Archives: Prediction Markets

How Long A Leash?

By Robin Hanson · May 24, 2010 7:20 pm · Comments (24)

While prediction markets on project completion dates often give spectacular accuracy improvements over official forecasts, hearing about this doesn’t make most organizations interested in adopting them. A plausible explanation for this is that managers often try to induce employee effort by manipulating the perceived chances of making the deadline. Employees will slack off if either the deadline seems impossible, or if it will be easily achieved; they work hardest when there is only a decent chance of success.

Similarly, it seems to me that many women (often unconsciously) try to keep their men maximally motivated to please them by giving them some but not too much sex. Men who think getting sex is easy, or impossible, don’t try as hard. At a party this weekend, I heard two middle-aged women lament that they had given away sex too easily in college; they envied the high prices young high-class prostitutes command.

This is why I predict the new “pink Viagra” will sell far less than its blue cousin. This new drug will be demanded by women who find it hard to offer their men enough sex to keep him near that optimal most-hungry point. But most women do not find this difficult.  In fact, I suspect some high-libido women have affairs in part to help them offer less sex to their men. Also, many women avoid sex with their man because they’ve decided (often unconsciously) that he’s just not good enough. Consider:

A German pharmaceutical giant wants to sell … “flibanserin.” … The company has sponsored studies involving more than 5,000 premenopausal women ages 18 to 50 in the United States, Canada and Europe in whom HSDD had been diagnosed. A 100-milligram daily dosage increased the number of satisfying sexual experiences that women had reported from the previous month — a key benchmark the FDA has set for such drugs — from an average of 2.7 to 4.5, compared with 3.7 among those taking a placebo. …

Critics say … “People think they are sick when they are not.” … For many women, waning sexual desire is a normal part of aging. For others, it could be a sign of other medical problems, a dysfunctional relationship or even an abusive partner. … “Is this going to make women desire an abusive partner?” asked Liz Canner, a documentary filmmaker who produced “Orgasm Inc.,” about the pharmaceutical industry’s role in developing drugs for female sexual disorders. “Is it going to make us desire every guy who walks by?”

I very much doubt men were as concerned that blue Viagra would make them too attracted to abusive women.

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RIP Medical Hypotheses

By Robin Hanson · May 9, 2010 5:15 pm · Comments (26)

Medical Hypotheses was established with the express intent of allowing ideas outside the mainstream to be aired so that they could be debated openly.

My article on medicine as a way to show we care was published in this (not especially prestigious) academic journal. Alas its editor Bruce Charlton has been sacked, its editorial policy ended, and two papers withdrawn, because it published a paper by UC Berkeley’s Peter Duesberg’s saying official South African mortality statistics seem at odds with a particular previous study’s estimates of the harm of their not using anti-HIV drugs. (The author of that previous study responded, suggesting official statistics are unreliable, and citing other sources that agreed with him.)  Duesberg’s inexcusible crime was suggesting at the end of his article that available data might be better explained if HIV is not the main cause of AIDS:

“Is academic freedom such a precious concept that scientists can hide behind it while betraying the public so blatantly?” asked John Moore, an Aids scientist at Cornell University, on a South African health news website last year. Moore suggested that universities could put in place a “post-tenure review” system to ensure that their researchers act within accepted bounds of scientific practice. “When the facts are so solidly against views that kill people, there must be a price to pay,” he added.

So how sure would we have to be of an academic claim for it to be reasonable to ban any academic publications offering evidence questioning that claim?  And how sure would be have to be before we could reasonably revoke the tenure of any academic who attempted such a publication?  I doubt we are that confident in the HIV-AIDS connection, and would love to see prediction market odds here.  Are there any offers to bet on record here?

HT Arnold.

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Fight The Fighters

By Robin Hanson · May 5, 2010 6:30 pm · Comments (19)

My undergrad public choice class ended with a lecture on futarchy. (Bryan Caplan says he did something similar in grad Public Finance.)  I think I convinced most students that futarchy is promising and worth trying, first on a small scale, and mostly met their objections to their satisfaction.  But I didn’t perceive much enthusiasm.  As usual, people don’t go to the barricades for efficiency; they get passionate about fighting enemies.  If only more people would object violently to futarchy, maybe we could inspire more interest in it. But just getting most folks more of what they want, who can get excited about that?

But consider: passion about pacifism.  There have been times, when the world was divided into sides fighting vicious and deadly wars, that some folks took the side of stopping the fights.  They took the natural passion of fighting an enemy and channeled it into fighting the fighters. I’d like to get folks to similarly see the wasteful pointlessness of today’s political battles. Today we induce millions of people to make up mostly-random political opinions on hundreds of diverse complex policy topics they hardly understand, split into warring factions based on shared opinions, and then fight vicious political battles over which factions get to make the government implement their random opinions. I’d rather folks focused on generating meta-political-opinions, not about particular policies like wars or bank bailouts, but about what political processes best choose effective policies.

Some folks are concerned that the public will feel dissed by Vote on Values, Bet on Beliefs, in that their opinions would no longer be solicited, via voting, on how to get what they want; they’d only be asked about what they want.  While anyone could speak on how to get stuff, those contributions would face stiff penalties for inaccuracy (as well as rewards for accuracy). But rather than seeing this as disrespect, I’d like folks to see it as a mark of status:  high status folks tend more to just tell their underlings what they want, and to say less about how to do that.  Better quality household servants, or exectutive assistants, need less instruction on how to do their job.  You can more just say you want scrambled eggs and toast for breakfast at 8am, and they’ll figure out how to make it happen.

Similarly, nations where citizens can effectively control their government by just specifying a national welfare function, and tweaking it a bit periodically, should be higher status than nations where ordinary citizens must continually form opinions on the effectiveness of hundreds of rapidly changing policies. For example, many Californians, who every few months face another thick booklet of direct democracy initiatives, complain they shouldn’t have to wade through such detail; isn’t that the politicians’ job? If political servants can’t be trusted to choose well without heavy monitoring, well then yes voters are forced to monitor them. But people with access to more trustworthy servants should gain the benefits both of having to pay less attention to details, as of the respect owed those who achieve such efficiency.

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Being Right Too Soon

By Robin Hanson · April 30, 2010 10:30 am · Comments (27)

Charles Peters … had a slogan … “If you’re not afraid of being right too soon.”  But of course, everyone is afraid of being right too soon. It’s bad politics, being out of step with the herd; it looks like you’re greedy if you profit from being wise while others suffer from their stupidity. People want to be “right” at the same time everyone else is — with the result that they delay action until the crunch hits with devastating force. Take the case of Goldman Sachs, this week’s favorite whipping boy. “Goldman Sachs sought to protect itself from a collapsing housing market by selling mortgage investments that it knew were likely to fail,” read the lead of a Post story posted on the Web Monday. Scandalous! Why didn’t they wait and get cratered like the folks at Lehman Brothers, R.I.P.?

The herd gallops toward the precipice for a simple reason: It’s lonely and unpopular to go the other way. Take the question of tax policies that could avert the next big U.S. financial disaster, which is our ballooning federal deficit. The sensible real-world answer, many economists argue, is a value-added tax that would encourage saving at the same time it pays down the deficit to manageable levels. But politicians are terrified of being right too soon on this one.

David Ignatius is right; this applies in politics, news, and even academia. Being into a topic or a position well before others gets you much less than being into it just as others are getting in. Arnold Kling echos:

Here are some of the phrases that are used to describe the Outsiders, the money managers who were right about the subprime bubble: ”rude”  blunt” ”bothers people” ”socially cut off” ”isolated” ”not hearing the signals”.

More emphasis on institutions like prediction markets would create more incentives to be right before others.  But, alas, I suspect this is a big reason why folks are reluctant to create them; they don’t want people to be rewarded for being right before they were.  They don’t like Goldman Sachs being rewarded for being right first.

In general, we don’t mind rewarding the fashion-savvy; those who pick up a fashion just as it is getting popular signal that they are well connected with fashion leaders.  But be too far ahead and you just look random, weird, and lucky; not well connected.  We also don’t mind rewarding “leaders” who know when our crowd is going where, and who “lead” by jumping out and marching in front of us; forager leaders did that all the time.  But we distrust folks who are rewarded for opposing our crowd; they are not leaders but are outsiders and enemies, and must be crushed.

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Democracy In Action

By Robin Hanson · April 22, 2010 11:00 am · Comments (29)

A Senate committee dealt a big blow to the plans of two trading firms looking to create a box-office futures exchange that would allow the movie industry as well as investors to wager on movie ticket sales. … Federal regulators only in the last week had given the first stage of approval to the exchanges. …

Included in the Wall Street Transparency and Accountability Act financial reform package, passed Wednesday by the Senate Agriculture Committee, is a provision banning futures trading on box office. …. [Many are] scheduled to testify along with other motion picture industry leaders before the House Subcommittee on General Farm Commodities and Risk Management, which is also investigating the proposed exchanges. … The next step in the Senate is for the Transparency and Accountability Act to be merged with similar legislation proposed by the Senate Banking Committee. (more; HT Midas Oracle)

This is sad hour for prediction markets.  Movie markets seem a near best case, where the public would:

  1. easily understand the value to be gained by more accurate estimates, since they could personally use prices when deciding what movies to see, and
  2. find it hard to get worked up about supposed “manipulation”; they know all their other sources of info on movies are manipulated as well.

The fact that one can kill these markets by just yelling “manipulation” in a crowded democracy is a very bad sign for other interesting markets in the US anytime soon.

A key confession by Max Keiser on HSX.com, today’s play money movie markets:

When I was CEO of HSX – I shared a board seat with members who were also on the board of Lionsgate Films.  Lionsgate was constantly moving the prices of their films (or films they had an interest in, or a friend’s film) on HSX as a way to manipulate perception and marketing dollar spends. … I went to war with the rest of the board to defend my creation, … [re] allowing the prices on HSX to be moved per ‘marketing’ requests made by the studios. This lead to a blowout on the board and my leaving HSX as a result.

I’ll take Max at his word.  So does this prove movie markets must be banned because manipulation is possible?  Well consider that the movie industry has been fine for 15 years with play money markets they can manipulate, and scared to death of real money markets, supposedly because someone might manipulate them.  The obvious difference:  it doesn’t cost much real money to manipulate play money markets, when market administrators will keep handing you as much play money as you want.

In contrast, the cost to manipulate real money markets would go through the roof, as savvy speculators jumped in on the other side of those losing manipulation bets.  On average, the movie industry would lose on their manipulation bets, fail to bias the prices, and increase movie market price accuracy.  Now you can see the movie industry’s real concern about manipulation: they might lose their ability to manipulate!

Added 5p: John Lopez at Vanity Fair says “the increased incentive for piracy still seems like a valid concern,” but given the huge incentive to pirate movies in order to watch them, it is hard to see pirating movies to maybe influence these thin markets would make much difference.

Added 6p: At lunch several of my colleagues sensibly suggested that studios are worried that more accurate pre-release movie quality estimates would make it easier for new studios to enter the movie industry.

Added 8p: Can this example finally put to rest the idea that play money markets work just as well as real money markets?

Added 24Apr: Early HSXer Ben Curtis comments below.

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Clone Acceptance Markets

By Robin Hanson · April 21, 2010 1:05 pm · Comments (42)

As a proud step-parent, I find it increasingly odd how many of you insist on the [standard kids-via-sex] “fifty percent solution.”  Ew!  What if [your kid] — heaven forbid — looks like you?  What if you’re both economists named Keynes?  But there’s more: the rest of your daughter looks just like the woman you chose to marry?  Yuck!!!!!  And so on.  Maybe you all think that fifty percent is great but one hundred percent is unacceptable, when it comes to the genes.  …  And I bet most of you don’t find it repugnant if a father wants a son rather than a daughter, but similarity of gender is pretty important too. …

[Notice] how quickly smart people will side with their Darwinian intuitions, and attack another smart person with intolerance, just because something feels icky to them.  It’s not so different from how some people find gay people, and also “what they do,” to be disgusting.

That is Tyler defending Bryan‘s desire to raise a clone of himself.   My initial reaction agrees with Tyler and Bryan.  On one side, the usual arguments for preferring to raise a genetically-related kid would seem to endorse clones as even better.   On the other side are the “ew, icky” feelings in many.   I don’t have those feelings, but I still accept that others having such feelings is relevant evidence.  So if I’m not going just assume my inarticulate feelings are wiser than those of others, how can I decide what to think here?  Bryan suggests a way out:

My prediction: Once a few thousand cloned humans are walking the earth, sneering at clones and people who want them will become as gauche as sneering at IVF babies and people who want them.

If Bryan’s prediction is true, that seems strong support for his case.  So I’ll strongly support creating a prediction market on this topic, and will agree with Bryan if market prices support him.

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Me On Al Jazeera

By Robin Hanson · April 7, 2010 8:25 pm · Comments (5)

Thursday at 12:30p EST I’ll appear live on the Riz Khan show of Al Jazeera.  I’ll discuss prediction markets, together with John Delaney of InTrade.  We are supposed to talk for over twenty minutes, though we’ll still probably just cover basics.

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Movie Manipulation

By Robin Hanson · March 31, 2010 7:00 pm · Comments (14)

Today, public perceptions about which new movies will be how popular is formed in a complex jumble of explicit advertising, word of mouth rumor, independent media evaluation, and paid ads masquerading as independent media.  This process is little like neutral analysis; it is packed full of vigorous attempts to manipulate our perceptions.

Two firms propose to augment this system with speculative markets forecasting movie sales. And the movie industry is horrified; this might let someone purposely influence perceptions of movie popularity!:

A growing coalition of entertainment industry workers, creators, independent producers and distributors, business organizations and theater owners today announced opposition to two proposals to establish online wagering services based on speculation over box office receipts for motion pictures. … The groups said that the proposal by MDEX and a separate plan by Cantor Futures Exchange, L.P. “are based on faulty understanding of the film industry and create a risk of rampant speculation and financial irresponsibility. … Now is not the time to open up new and highly speculative marketplaces that could end up costing jobs and harming legitimate businesses … We will address whether any exchange infrastructure is capable of surveying the box office marketplace to detect and address potential market manipulation.

My research suggests that speculative markets are remarkably robust to manipulation attempts; the more folks try to manipulate, the more accurate market estimates get on average!  But with limited funding, I’ve only done a limited number of experiments; I can’t prove no one will ever use a speculative market to purposely influence movie perceptions.  And alas this mere possibility of manipulation may seem intolerable.

An enormous double standard favors existing ads and mass media over proposed speculative markets.  No one has to run experiments showing that manipulation is impossible with existing institutions; in fact, we all know such manipulation is rampant.  But many will call it irresponsibly risky to let speculative markets permit further manipulation, even if the ratio of error to solid info is far lower there.

Robust movie markets would in fact give the public more reliable estimates of movie popularity, estimates more resistant to movie industry manipulation.  Could it be that what the movie industry fears most is not more manipulation, but less?

Hat tip Trey Kollmer.

Added 1Apr: Some say that a model based on Twitter can predict movies better than the HSX prediction market.  Let’s set aside the level confusion here (HSX could do better if its traders had access to this model).  Does anyone doubt that, if this model’s predictions were taken seriously, Twitter could be used to manipulate movie perceptions?  Does anyone expect the movie industry to therefore request regulators to ban movie tweets?   Still can’t see the double standard?

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Firms Won’t Experiment

By Robin Hanson · March 25, 2010 2:35 pm · Comments (18)

I’ve often tried to help [convince] companies do experiments, and usually I fail spectacularly. … Companies pay amazing amounts of money to get answers from consultants with overdeveloped confidence in their own intuition. Managers rely on focus groups — a dozen people riffing on something they know little about — to set strategies. And yet, companies won’t experiment to find evidence of the right way forward.  I think this irrational behavior stems from two sources. One, … experiments require short-term losses for long-term gains. … Second, there’s the false sense of security that heeding experts provides.

More here (HT Tyler).   Wow – and I was puzzled by firms disinterest in prediction markets; experiments have a much better intellectual pedigree.  Hiring consultants allows one to affiliate with prestigious folks, while focus groups allow one to brag about “listening to the people” (which is in fact how prediction markets are usually sold).  Apparently actually improving decision quality is way way down in the manager priority list.

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Risk Rating Reluctance

By Robin Hanson · February 2, 2010 9:50 pm · Comments (34)

Managers of many financial organizations are arguably tempted to take too much risk with organizational investments.  Reputation-wise, such managers often gain more from stellar investments than they lose from disastrous ones.  Many regulations try to address this problem by limiting such organizations to “safe” investments, as determined by a few official ratings agencies.  This creates a demand by such managers for assets that are actually risky, but which are officially rated as safe.

Apparently the recent financial crisis was due in part to those official risk rating agencies supplying this demand; they are private firms and profited from applying too little skepticism to whether certain key assets really were as safe as some claimed.  No doubt those agencies say that this was all a terrible accident, that they never intended to profit from mistakenly calling risky things safe, but since they seem to have suffered little from the harm they assisted in creating for others, I have my doubts.

In all the financial reform discussions, I haven’t heard any proposals to address this specific problem.  And I’ve always wondered why we need investment ratings agencies anyway.  In principle, the right financial assets can give any elements you like from a full joint probability distribution over asset returns; how could a ratings agency expect to do consistently better?

At lunch today I asked my wise colleague Garett Jones about this, and he suggested that big financial orgs like being rated by people they can pressure. If they don’t like a rating, they can work their elite-school-alum networks of contacts to apply pressure to the ratings agencies to change unwanted ratings.  Such pressure is much less effective on financial market prices.  Garett also pointed me to this passage of his:

[Remember] the debate over subordinated debt in the early 2000’s, surveyed in Stern and Feldman’s Too Big to Fail. The Gramm-Leach-Bliley financial reform bill attempted to create a class of subordinated debt that would be explicitly banned from any future bailouts.  Major financial institutions would have been be required to hold some portion of their liabilities in the form of subordinated debt in order to give financial markets and regulators alike a market-based measure of firm health: If yields on a major firm’s subordinated debt spiked, that would be a warning sign.  But financial institutions and the Federal Reserve Board both pushed back against this market-based indicator, and so the subordinated debt requirement never made it through the regulatory process. … Firms will resist issuing debt that is bailout-free, and will overwhelmingly prefer debt that is bailout-qualified.

Bailouts mess up the connection between asset prices and their inherent risks.  Ordinarily, market prices only tell you the chance that a debt will be paid, not whether it would have been paid without a bailout.

This is all moderately bad news for prediction markets in such firms.  Apparently well-connected managers already know they prefer estimates by officials who respond to social pressure, over hard-to-manipulate market estimates, even if the later are more accurate.  Of course less well-connected managers should prefer the opposite, but who wants to signal their bad connections by endorsing independent markets?

Added 8a: Unnamed points us to Matt Yglesias responding in Sept. to Kevin Drum and an August Policy Report by Mark Calabria.  Kevin says:

Over the past decade ratings agencies were, at best, negligent, and at worst, perpetrators of outright fraud.

but doesn’t think raters were a big problem because other orgs used similar risk models and both buyers and sellers liked the mis-labeling.  Yet this is just what a corrupted regulator model predicts.  These folks consider switching who pays the raters, or making them a direct government agency, but not replacing them with direct market price risk estimates – why so blind to such an obvious solution?

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